Smithfield Bid for Meat Business Prior to Shuanghui Deal

By Simon Casey and Shruti Date Singh -
Jun 19, 2013

Smithfield Foods Inc. (SFD), the world’s
largest hog producer, bid for a large packaged-meat business
after it got an initial takeover offer from Shuanghui
International Ltd. and before it agreed to be acquired by the
Chinese company.

Smithfield’s offer was made March 25 and was rejected by
the target on April 10, the U.S. company said yesterday in its
proxy statement. Smithfield, which retained Barclays Plc to help
evaluate the “potentially significant” deal, didn’t identify
the business.

The U.S. pork producer had considered a purchase in the
packaged-meat industry since January, and the proposed deal was
discussed at an April 21 board meeting, the statement shows.
Possible targets in the U.S. include Chicago-based Hillshire
Brands Co. (HSH) and closely held Land O’Frost Inc., said Ken Goldman,
an analyst at JPMorgan Chase & Co. in New York.

“There are few packaged meat companies of size in the
U.S.,” Goldman said today in a note. “The fact that any large
packaged meats business was being pursued should be read as a
positive for a pure play such as Hillshire, as it suggests an
attractive M&A environment.”

Mike Cummins, a Hillshire spokesman, said the company
doesn’t comment on rumor or speculation. Voicemails seeking
comment from Land O’Frost executives weren’t immediately
returned.

Breakup Considered

The proxy statement also shows Smithfield received
competing offers from two other foreign companies following the
initial $30-a-share bid from Hong Kong-based Shuanghui and
considered other options including breaking up the company and a
sale to a private-equity firm. It agreed on May 29 to
Shuanghui’s revised bid of $34-a-share.

Smithfield weighed the possibilities as the outlook for its
fourth-quarter earnings weakened and after investor Continental
Grain Co. said in a March letter the hog producer should be
split up.

“The Smithfield board considered the acquisition of the
packaged meats business to be potentially attractive, but was
concerned about whether it would be possible to make the
acquisition on terms that were financially favorable to
Smithfield,” given its initial offer had been rejected, the
company said in the statement. It was also concerned “whether
it would be possible to achieve the synergies necessary” to
make such a deal “financially successful,” Smithfield said.

Competing Bids

The $4.7 billion agreed Shuanghui deal, if completed, will
be the largest Chinese acquisition of a U.S. company. The March
7 letter from Continental Grain “probably accelerated” talks
with Shuanghui that had started in late 2012, Smithfield Chief
Executive Officer C. Larry Pope said in a May 29 interview.

Continental said April 25 its proposal to split Smithfield
would achieve a stock price of $40 within three years. It
subsequently backed the bid from Shuanghui and said it will exit
its holding after the deal.

Shares of the Smithfield, Virginia-based company rose 0.3
percent to $33.11 at 12:25 p.m. in New York. It traded at $25.97
on March 28, the day before Shuanghui’s $34 bid was announced.

Antitrust Concerns

Smithfield received a competing $30-a-share offer on April
26, from a publicly traded non-U.S. company it didn’t identify,
that was later raised to $33.50 on May 3, it said in the proxy
statement yesterday. Smithfield said the bid raised potential
antitrust concerns in the U.S., and the bidder never signed a
confidentiality agreement.

The second competing bidder, also a publicly traded non-U.S. company that wasn’t identified in the statement, initially
approached Smithfield with a proposal that included it taking a
minority stake of as much as 9.9 percent.

On May 8 it proposed a bid of $31 to $35 a share. It later
offered $34 a share, before talks ended because the potential
acquirer couldn’t announce a deal earlier than June 13,
Smithfield said in the proxy statement.

The Shuanghui deal is expected to be completed in the
second half subject to antitrust approvals including that of the
Committee on Foreign Investment in the U.S.

Also disclosed in the proxy statement is the $275 million
reverse termination fee payable by Shuanghui under certain
conditions, including if the Chinese company fails to raise the
required debt financing for the takeover.